---

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SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

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FORM 10-Q

(Mark One)

|/x/ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
|--- | ----------------------------------------------------------------------------------------

For the quarterly period ended December 31, 2000

or

|/ / | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
|--- | -----------------------------------------------------------------------------------------

For the transition period from  to

Commission File Number 0-12950

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ALLIANCE PHARMACEUTICAL CORP.(Exact name of Registrant as specified in its charter)

New York(State or other jurisdiction
of incorporation or organization)

14-1644018(I.R.S. Employer
Identification Number)3040 Science Park Road
San Diego, California(Address of principal
executive offices)

92121Zip Code


858/410-5200Registrant's telephone number, including area code


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Indicate
by a check whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to filing requirements for the past
90 days. Yes /x/  No / /

As
of February 9, 2001, Registrant had 49,494,846 shares of its Common Stock, $.01 par value, outstanding.

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ALLIANCE PHARMACEUTICAL CORP. AND SUBSIDIARIES

|INDEX                                                                                         |                                                      | Page No.
|--------------------------------------------------------------------------------------------- | ---------------------------------------------------- | --------
|PART IFINANCIAL INFORMATION                                                                  |                                                      |         
|Item 1. Financial Statements                                                                  |                                                      |         
|                                                                                              | Condensed Consolidated Balance Sheets                |         
|                                                                                              | Condensed Consolidated Statements of Operations      |         
|                                                                                              | Condensed Consolidated Statements of Cash Flows      |         
|                                                                                              | Notes to Condensed Consolidated Financial Statements |         
|Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations |                                                      | 8       
|Item 3. Quantitative and Qualitative Disclosures About Market Risk                            |                                                      | 13      
|PART IIOTHER INFORMATION                                                                     |                                                      |         
|Item 2. Changes in Securities and Use of Proceeds                                             |                                                      | 13      
|Item 4. Submission of Matters to a Vote of Security Holders                                   |                                                      | 13      
|Item 6. Exhibits and Reports on Form 8-K                                                      |                                                      | 14      

2

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Part I Financial Information:

Item 1. Financial Statements

ALLIANCE PHARMACEUTICAL CORP. AND SUBSIDIARIES  CONDENSED CONSOLIDATED BALANCE SHEETS

|                                     |                                                                                                                                                                            | December 31,
2000          |            | June 30,
2000 |           
|------------------------------------ | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ---------- | ------------- | ----------
|
|Assets                               |                                                                                                                                                                            |                            |            |               |           
|Current assets:                      |                                                                                                                                                                            |                            |            |               |           
|                                     | Cash and cash equivalents                                                                                                                                                  |                            | $          | 29,427,000    |           
|                                     | Short-term investments                                                                                                                                                     |                            |            | 676,000       |           
|                                     | Other receivable                                                                                                                                                           |                            |            |              |           
|                                     | Research revenue receivable                                                                                                                                                |                            |            |              |           
|                                     | Other current assets                                                                                                                                                       |                            |            | 542,000       |           
|                                     |                                                                                                                                                                            |                            |            |               |           
|                                     |                                                                                                                                                                            | Total current assets       |            |               | 30,645,000
|Property, plant and equipment  net  |                                                                                                                                                                            |                            | 19,118,000 |               |           
|Purchased technology  net           |                                                                                                                                                                            |                            | 14,520,000 |               |           
|Restricted cash                      |                                                                                                                                                                            |                            | 6,500,000  |               |           
|Investment in joint venture          |                                                                                                                                                                            |                            | 5,000,000  |               |           
|Other assets  net                   |                                                                                                                                                                            |                            | 2,749,000  |               |           
|                                     |                                                                                                                                                                            |                            |            |               |           
|                                     |                                                                                                                                                                            | $                          | 78,532,000 |               | $         
|                                     |                                                                                                                                                                            |                            |            |               |           
|Liabilities and Stockholders' Equity |                                                                                                                                                                            |                            |            |               |           
|Current liabilities:                 |                                                                                                                                                                            |                            |            |               |           
|                                     | Accounts payable                                                                                                                                                           |                            | $          | 5,643,000     |           
|                                     | Accrued expenses                                                                                                                                                           |                            |            | 4,698,000     |           
|                                     | Current portion of long-term debt                                                                                                                                          |                            |            | 4,639,000     |           
|                                     |                                                                                                                                                                            |                            |            |               |           
|                                     |                                                                                                                                                                            | Total current liabilities  |            |               | 14,980,000
|Deferred revenue                     |                                                                                                                                                                            |                            | 10,000,000 |               |           
|Long-term debt                       |                                                                                                                                                                            |                            | 30,329,000 |               |           
|Stockholders' equity:                |                                                                                                                                                                            |                            |            |               |           
|                                     | Preferred stock  $.01 par value; 5,000,000 shares authorized; 500,000 shares of Series F issued and outstanding at December 31, 2000 and June 30, 2000                    |                            |            | 5,000         |           
|                                     | Common stock  $.01 par value; 125,000,000 shares authorized; 49,438,569 and 47,233,454 shares issued and outstanding at December 31, 2000 and June 30, 2000, respectively |                            |            | 494,000       |           
|                                     | Additional paid-in capital                                                                                                                                                 |                            |            | 425,409,000   |           
|                                     | Accumulated comprehensive income (loss)                                                                                                                                    |                            |            | 192,000       |           
|                                     | Accumulated deficit                                                                                                                                                        |                            |            | (402,877,000  | )         
|                                     |                                                                                                                                                                            |                            |            |               |           
|                                     |                                                                                                                                                                            | Total stockholders' equity |            |               | 23,223,000
|                                     |                                                                                                                                                                            |                            |            |               |           
|                                     |                                                                                                                                                                            | $                          | 78,532,000 |               | $         
|                                     |                                                                                                                                                                            |                            |            |               |           

Note: The balance sheet at June 30, 2000 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements.

3

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ALLIANCE PHARMACEUTICAL CORP. AND SUBSIDIARIES  CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

|                                              |                              | Three months ended
December 31, |             | Six months ended
December 31, |  
|--------------------------------------------- | ---------------------------- | ------------------------------- | ----------- | ----------------------------- | -
|
|
|Revenues:                                     |                              |                                 |             |                               |  
|                                              | License and research revenue |                                 | $           | 396,000                       |  
|Operating expenses:                           |                              |                                 |             |                               |  
|                                              | Research and development     |                                 |             | 13,926,000                    |  
|                                              | General and administrative   |                                 |             | 2,261,000                     |  
|                                              |                              |                                 |             |                               |  
|                                              |                              |                                 | 16,187,000  |                               |  
|                                              |                              |                                 |             |                               |  
|Loss from operations                          |                              |                                 | (15,791,000 | )                             |  
|Imputed interest expense on convertible notes |                              |                                 |            |                               |  
|Investment income                             |                              |                                 | 514,000     |                               |  
|Interest expense                              |                              |                                 | (569,000    | )                             |  
|                                              |                              |                                 |             |                               |  
|Net loss applicable to common shares          |                              | $                               | (15,846,000 | )                             | $
|                                              |                              |                                 |             |                               |  
|Net loss per common share:                    |                              |                                 |             |                               |  
|                                              | Basic and diluted            |                                 | $           | (0.33                         | )
|                                              |                              |                                 |             |                               |  
|Weighted average shares outstanding:          |                              |                                 |             |                               |  
|                                              | Basic and diluted            |                                 |             | 48,429,000                    |  
|                                              |                              |                                 |             |                               |  

See
Accompanying Notes to Condensed Consolidated Financial Statements

4

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ALLIANCE PHARMACEUTICAL CORP. AND SUBSIDIARIES  CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                                        |                                                                   | Six months ended
December 31,                           |                                             
|----------------------------------------------------------------------- | ----------------------------------------------------------------- | ------------------------------------------------------- | --------------------------------------------
|
|
|Operating activities:                                                   |                                                                   |                                                         |                                             
|                                                                        | Net loss                                                          |                                                         | $                                           
|                                                                        | Adjustments to reconcile net loss to net cash used in operations: |                                                         |                                             
|                                                                        |                                                                   | Depreciation and amortization                           |                                             
|                                                                        |                                                                   | Imputed interest expense on convertible notes           |                                             
|                                                                        |                                                                   | Expense associated with warrant and debt issuance       |                                             
|                                                                        |                                                                   | Gain on sale of equity securities                       |                                             
|                                                                        |                                                                   | Receipt of equity securities in exchange for technology |                                             
|                                                                        |                                                                   | Issuance of common stock in exchange for technology     |                                             
|                                                                        |                                                                   | Non-cash compensation  net                             |                                             
|                                                                        |                                                                   | Changes in operating assets and liabilities:            |                                             
|                                                                        |                                                                   |                                                         | Research revenue receivable                 
|                                                                        |                                                                   |                                                         | Restricted cash and other assets            
|                                                                        |                                                                   |                                                         | Accounts payable, accrued expenses and other
|                                                                        |                                                                   |                                                         |                                             
|Net cash used in operating activities                                   |                                                                   |                                                         | (32,514,000                                 
|                                                                        |                                                                   |                                                         |                                             
|Investing activities:                                                   |                                                                   |                                                         |                                             
|                                                                        | Sales and maturities of short-term investments                    |                                                         |                                             
|                                                                        | Cash acquired from MBI acquisition                                |                                                         |                                             
|                                                                        | Property, plant and equipment                                     |                                                         |                                             
|                                                                        |                                                                   |                                                         |                                             
|Net cash provided by (used in) investing activities                     |                                                                   |                                                         | 11,166,000                                  
|                                                                        |                                                                   |                                                         |                                             
|Financing activities:                                                   |                                                                   |                                                         |                                             
|                                                                        | Issuance of common stock                                          |                                                         |                                             
|                                                                        | Proceeds from long-term debt                                      |                                                         |                                             
|                                                                        | Proceeds from option to purchase convertible notes                |                                                         |                                             
|                                                                        | Principal payments on long-term debt                              |                                                         |                                             
|                                                                        |                                                                   |                                                         |                                             
|Net cash provided by (used in) financing activities                     |                                                                   |                                                         | 22,054,000                                  
|                                                                        |                                                                   |                                                         |                                             
|Increase (decrease) in cash and cash equivalents                        |                                                                   |                                                         | 706,000                                     
|Cash and cash equivalents at beginning of period                        |                                                                   |                                                         | 28,721,000                                  
|                                                                        |                                                                   |                                                         |                                             
|Cash and cash equivalents at end of period                              |                                                                   | $                                                       | 29,427,000                                  
|                                                                        |                                                                   |                                                         |                                             
|Supplemental disclosure of non-cash investing and financing activities: |                                                                   |                                                         |                                             
|                                                                        | Issuance of common stock related to MBI acquisition               |                                                         | $                                           
|                                                                        | Net liabilities acquired from MBI acquisition                     |                                                         | $                                           
|                                                                        | Issuance of common stock upon conversion of notes                 |                                                         | $                                           
|                                                                        | Deferred interest expense on long-term debt                       |                                                         | $                                           

See
Accompanying Notes to Condensed Consolidated Financial Statements

5

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ALLIANCE PHARMACEUTICAL CORP. AND SUBSIDIARIES  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Organization and Summary of Significant Accounting Policies

Organization

Alliance Pharmaceutical Corp. and its subsidiaries (collectively, the "Company" or "Alliance") are engaged in identifying, designing, and developing novel
medical products.

Principles of Consolidation

The consolidated financial statements include the accounts of Alliance Pharmaceutical Corp., the accounts of its recently acquired subsidiary Molecular
Biosystems, Inc. ("MBI") from the acquisition date of December 29, 2000, its wholly owned subsidiary Astral, Inc., its wholly owned subsidiary MDV Technologies, Inc., its
wholly owned subsidiary Alliance Pharmaceutical GmbH, from its inception in December 1998, and its majority-owned subsidiary Talco Pharmaceutical, Inc. All significant intercompany
accounts and transactions have been eliminated. Certain amounts in 2000 have been reclassified to conform to the current year's presentation.

Interim Condensed Financial Statements

The condensed consolidated balance sheet as of December 31, 2000, the condensed consolidated statements of operations for the three and six months ended
December 31, 2000 and 1999, and the condensed consolidated statements of cash flows for the six months ended December 31, 2000 and 1999 are unaudited. In the opinion of management, such
unaudited financial statements include all adjustments, consisting only of normal recurring accruals, necessary for a fair presentation of the results
for the periods presented. Interim results are not necessarily indicative of the results to be expected for the full year. The financial statements should be read in conjunction with the Company's
consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended June 30, 2000.

Purchased Technology

The purchased technology was primarily acquired as a result of the merger of Fluoromed Pharmaceutical, Inc. into a subsidiary of the Company in fiscal
1989. The technology acquired is the Company's core perfluorochemical ("PFC") technology and was valued based on an analysis of the present value of future earnings anticipated from this technology at
that time. The Company identified alternative future uses for the PFC technology, including theOxygent(temporary blood substitute) and LiquiVent®(intrapulmonary oxygen carrier) products. Purchased technology also includes $5 million for technology capitalized as a
result of the acquisition of MBI in December 2000.

The
PFC technology is the basis for the Company's main drug development programs and is being amortized over a 20-year life. The PFC technology has a book value of
$9.5 million and $10.1 million, net of accumulated amortization of $13.7 million and $13.2 million at December 31 and June 30, 2000, respectively. The
technology acquired from MBI has a book value of $5 million and is being amortized over four years.

The
carrying value of purchased technology is reviewed periodically based on the projected cash flows to be received from license fees, milestone payments, royalties and other product
revenues. If such cash flows are less than the carrying value of the purchased technology, the difference will be charged to expense.

6

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Comprehensive Income and Loss

Effective July 1, 1998, the Company adopted the Financial Accounting Standards Board's Statement No. 130, Comprehensive Income ("SFAS
No. 130"). SFAS No. 130 establishes new rules for the reporting and display of comprehensive income and its components; however, the adoption of SFAS No. 130 had no impact on the
Company's net loss or stockholders' equity. SFAS No. 130 requires unrealized gains and losses on the Company's available-for-sale securities to be included in
comprehensive income. During the three months ended December 31, 2000 and 1999, the total comprehensive loss, which
includes the unrealized gain or loss on available-for-sale securities, was $16,019,000 and $100,000, respectively. During the six months ended December 31, 2000 and
1999, the total comprehensive loss, which includes the unrealized gain or loss on available-for-sale securities, was $33,004,000 and $10,820,000, respectively.

Net Income (Loss) Per Share

The Company computes net loss per common share in accordance with Financial Accounting Standards No. 128, Earnings Per Share ("SFAS No. 128").
SFAS No. 128 requires the presentation of basic and diluted earnings per share amounts. Basic earnings per share is calculated based upon the weighted average number of common shares
outstanding during the period while diluted earnings per share also gives effect to all potential dilutive common shares outstanding during the period such as common shares underlying options,
warrants, and convertible securities, and contingently issuable shares. All potential dilutive common shares have been excluded from the calculation of diluted earnings per share as their inclusion
would be anti-dilutive.

2. ACQUISITION OF MOLECULAR BIOSYSTEMS, INC.

On December 29, 2000, the Company acquired MBI in exchange for 770,000 shares of Alliance common stock. MBI is the developer of Optison®, an intravenous
ultrasound contrast agent being marketed in both the United States and Europe. The acquisition was accounted for as
a purchase in accordance with the provisions of APB No. 16.

A
summary of the MBI acquisition costs and allocation to the assets acquired and liabilities assumed is as follows:

Total acquisition costs:Issuance of common stock

$
10,526,000Acquisition-related expenses


600,000$
11,126,000Allocated to assets and liabilities as follows:Tangible assets acquired

$
10,130,000Assumed liabilities


(4,040,000
)Purchased technology


5,036,000$
11,126,000


7

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Assuming
that the acquisition of MBI had occurred on the first day of the Company's fiscal year ended June 30, 2000, (unaudited) pro forma condensed consolidated financial
information would be as follows:

Six months ended December 31,2000

1999Revenues

$
2,114,000

$
20,122,000Net Loss


(33,870,000
)

(16,658,000
)Net loss per share, basic and diluted


(0.71
)

(0.38
)


This
pro forma information is not necessarily indicative of the actual results that would have been achieved had MBI been acquired the first day of the Company's fiscal year ended
June 30, 2000, nor is it necessarily indicative of future results.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations(References to years are to the Company's  fiscal years ended June 30.)

Since
commencing operations in 1983, the Company has applied substantially all of its resources to research and development programs and to clinical trials. The Company has incurred
losses since inception and, as of December 31, 2000, has an accumulated deficit of $402.9 million. The Company expects to incur significant losses over at least the next few years as the
Company continues its research and product development efforts and attempt to commercialize its products.

The
Company's revenues have come primarily from collaborations with corporate partners, including research and development and milestone payments. The Company's expenses have
consisted primarily of research and development costs and administrative costs. To date, the Company's revenues from the sale of products have not been significant. The Company believes its future
operating results may be subject to quarterly fluctuations due to a variety of factors, including the timing of future collaborations and the achievement of milestones under collaborative agreements,
whether and when new products are successfully developed and introduced by the Company or its competitors, and market acceptance of products under development.

Liquidity and Capital Resources

Through December 2000, the Company financed its activities primarily from public and private sales of equity and debt securities, and funding from
collaborations with corporate partners.

In
November 2000, the Company sold $7 million in principal amount of five-year 6% subordinated convertible notes to certain investors. The notes are
convertible at any time after November 15, 2001, at each investor's option into shares of Alliance common stock at $15.72 per share, subject to certain antidilution provisions. The Company will
have certain rights to cause the notes to convert into common stock. The investors also paid $1.5 million for the option to purchase at any time $9.9 million of zero-coupon
subordinated convertible notes, convertible into Alliance common stock at $22.17 per share, subject to certain antidilution provisions. In connection with the transaction, Alliance placed
$1.5 million in a restricted cash account to be used to pay interest on the issued notes.

In
August and September 2000, the Company sold $12 million in principal amount of four-year 5% subordinated convertible debentures to certain investors. The
debentures are convertible at any time at each investor's option into shares of Alliance common stock at $13.32 per share, subject to certain
antidilution provisions. The conversion price of the debentures was below the trading market price on the day the debentures were issued. As a result of this beneficial conversion price, the Company
recorded an immediate charge to interest expense of $1.1 million on these convertible debentures. The Company will have certain rights to cause the debentures to convert into common stock. The
investors

8

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will have the option at any time to purchase, and the Company will have certain rights to require the investors to purchase, an additional $12 million of four-year 5% subordinated
convertible debentures, convertible into Alliance common stock at $16 per share, subject to certain antidilution provisions.

In
February 2000, the Company sold $15 million in four-year 5% subordinated convertible debentures to certain investors. During the six months ended
December 31, 2000, $6.1 million of these debentures were converted into 632,124 shares of Alliance common stock.

In
January 1997, the Company entered into a loan and security agreement with a bank under which the Company received $3.5 million and, in December 1997, the
amount available under the loan was increased to $15.2 million. In June 1998, the Company restructured the loan to provide for up to $15 million at the bank's prime rate plus
0.5%. Amounts borrowed are secured by a $5 million restricted certificate of deposit, by certain fixed assets and patents, and are scheduled to be repaid over three years. If certain financial
covenants are not satisfied, the outstanding balance may become due and payable. On December 31, 2000, the balance outstanding on this loan was $7.1 million.

In
May 2000, Alliance and Baxter Healthcare Corporation ("Baxter") entered into a joint venture for the manufacture, marketing, sales and distribution of Oxygentin the United States, Canada and
countries in the European Union (the "Baxter Territory"). The companies formed PFC Therapeutics, LLC ("PFC
Therapeutics") to oversee the further development, manufacture, marketing, sales and distribution ofOxygent; and each party invested $5 million
in PFC Therapeutics. In connection with the transaction, PFC Therapeutics obtained an exclusive license in the Baxter Territory, to manufacture and market all of the Company's injectable
perfluorochemical emulsions capable of transporting oxygen in therapeutic effective amounts in the bloodstream, includingOxygent.PFC Therapeutics paid
Alliance a prepaid royalty of $10 million, which has been recorded as deferred revenue. Alliance and Baxter will also share in the distribution of PFC Therapeutics' future cash flows. Under the
arrangement, Alliance will continue to fund the current development plan forOxygent'sinitial approval in the Baxter Territory. PFC Therapeutics has a
right of first offer to licenseOxygentin one or more countries outside the Baxter Territory. Pursuant to a manufacturing and supplier agreement
between Alliance and PFC Therapeutics, Alliance will initially manufactureOxygentfor distribution in the Baxter Territory. Under separate agreements
between Baxter and PFC Therapeutics, Baxter will have the exclusive right to promote, market, distribute and sellOxygentin the Baxter Territory, and
Baxter has the right to take over the manufacturing responsibility forOxygent. In connection with this arrangement, Baxter has purchased 500,000 shares
of the Company's convertible Series F Preferred Stock for $20 million. In order for Baxter to maintain its rights to commercialize the product, Baxter is required to purchase
$15 million of convertible redeemable preferred stock from Alliance in March 2001 and an additional $15 million of such stock in September 2001.

The
Company had net working capital of $15.7 million at December 31, 2000, compared to $21.3 million at June 30, 2000. The Company's cash, cash
equivalents, and short-term investments decreased to $30.1 million at December 31, 2000, from $33.5 million at June 30, 2000. The decrease resulted primarily
from net cash used in operations of $32.5 million and principal payments on long-term debt of $2.1 million, partially offset by proceeds of $19 million from the sale
of convertible debentures and notes and proceeds of $4.6 million from the sale of short-term investments. As a result of the MBI acquisition, the Company increased its cash and
marketable securities by $8 million. The Company's operations to date have consumed substantial amounts of cash and are expected to continue to do so for the foreseeable future.

9

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On
January 8, 2001, the Company announced that it had voluntarily suspended enrollment in its Phase 3 cardiac surgery study with Oxygentdue to an imbalance between the treatment and control groups in
certain adverse events, primarily the incidence of stroke. While the frequency
of these events in theOxygenttreatment group was in agreement with published data for patients undergoing cardiac bypass surgery, the control group
frequency was remarkably low, causing the imbalance.Oxygenthas been evaluated in 19 clinical studies involving more than 1,400 subjects. The events
that prompted the suspension of the study were not apparent in the previous studies, which include a completed Phase 3 study with 492 general surgery patients that demonstrated significant reduction
and avoidance in blood usage compared to the control population. The Company is currently investigating the reasons for the imbalance. On January 22, 2001, the Company announced that it was
reducing its workforce by approximately 50 employees and undertaking other planned decreases in expenditures to conserve cash. The Company anticipates that these actions will result in cost savings of
approximately $14 million annualized.

The
Company continually reviews its product development activities in an effort to allocate its resources to those product candidates that the Company believes have the greatest
commercial potential. Factors considered by the Company in determining the products to pursue include projected markets and need, potential for regulatory approval and reimbursement under the existing
healthcare system, status of its proprietary rights, technical feasibility, expected and known product attributes, and estimated costs to bring the product to market. Based on these and other factors,
the Company may from time to time reallocate its resources among its product development activities. Additions to products under development or changes in products being pursued can substantially and
rapidly change the Company's funding requirements.

The
Company expects to incur substantial expenditures associated with product development, particularly forImavist and Oxygent.The Company is seeking
additional collaborative research and development relationships with suitable corporate partners for its
non-licensed products. With respect toLiquiVent, prior to the end of the fiscal year the Company expects to receive preliminary data from
its recently completed Phase 2/3 clinical trial. If the data is favorable, the Company intends to seek a partner prior to undertaking further development of the product. There can be no assurance that
such relationships, if any, will successfully reduce the Company's funding requirements. Additional equity or debt financing may be required, and there can be no assurance that such financing will be
available on reasonable terms, if at all. If adequate funds are not available, the Company may be required to delay, scale back, or eliminate one or more of its product development programs, or obtain
funds through arrangements with collaborative partners or others that may require the Company to relinquish rights to certain of its technologies, product candidates, or products that the Company
would not otherwise relinquish.

Alliance
anticipates that its current capital resources, expected equity investments by Baxter and expected revenue from investments will be adequate to satisfy its capital
requirements through at least calendar 2001. The Company's future capital requirements will depend on many factors, including, but not limited to, continued scientific progress in its research and
development programs, progress with preclinical testing and clinical trials, the time and cost involved in obtaining regulatory approvals, patent costs, competing technological and market
developments, changes in existing collaborative relationships, the ability of the Company to establish additional collaborative relationships, and the cost of manufacturing scale-up.

While
the Company believes that it can produce materials for clinical trials and the initial market launch forOxygentand Imavistat its existing San Diego,
California facilities and forLiquiVentat its Otisville, New York
facility, it may need to expand its commercial manufacturing capabilities for its products in the future. Any expansion for any of its products may occur in stages, each of which would require
regulatory approval, and product demand could at times exceed supply capacity. The Company has not selected a site for such expanded facilities and cannot predict the amount it will expend for the
construction of such facilities. There can be no assurance as to when or whether the U.S. Food and

10

---

Drug Administration ("FDA") will determine that such facilities comply with Good Manufacturing Practices. The projected location and construction of such facilities will depend on regulatory
approvals, product development, and capital resources, among other factors. The Company has not obtained any regulatory approvals for its production facilities for these products, nor can there be any
assurance that it will be able to do so. The Company currently has responsibility for manufacturingOxygent; however, Baxter has the right to take over
responsibility for manufacturing the product for sale in the Baxter Territory. The license agreement with Schering AG, Germany ("Schering") requires the Company to manufacture products at its San
Diego facility for a period of time after market launch at a negotiated price. Schering will be responsible for establishing production capacity beyond the maximum capacity of the San Diego facility.

Except
for historical information, the statements made herein and elsewhere are forward-looking. The Company wishes to caution readers that these statements are only predictions and
that the Company's business is subject to significant risks. The factors discussed herein and other important factors, in some cases have affected, and in the future could affect, the Company's actual
results and could cause the Company's actual consolidated results for 2001, and beyond, to differ materially from those expressed in any forward-looking statements made by, or on behalf of, the
Company. These risks include, but are not limited to, the inability to obtain adequate financing for the Company's development efforts; the inability to enter into collaborative relationships to
further develop and commercialize the Company's products; changes in any such relationships, or the inability of any collaborative partner to adequately commercialize any of the Company's products;
the uncertainties associated with the lengthy regulatory approval process; and the uncertainties associated with obtaining and enforcing patents important to the Company's business; and possible
competition from other products. Furthermore, even if the Company's products appear promising at an early stage of development, they may not reach the market for a number of important reasons. Such
reasons include, but are not limited to, the possibilities that
the potential products will be found ineffective during clinical trials; failure to receive necessary regulatory approvals; difficulties in manufacturing on a large scale; failure to obtain market
acceptance; and the inability to commercialize because of proprietary rights of third parties. The research, development, and market introduction of new products will require the application of
considerable technical and financial resources, while revenues generated from such products, assuming they are developed successfully, may not be realized for several years. Other material and
unpredictable factors which could affect operating results include, without limitation, the uncertainty of the timing of product approvals and introductions and of sales growth; the ability to obtain
necessary raw materials at cost-effective prices or at all; the effect of possible technology and/or other business acquisitions or transactions; and the increasing emphasis on controlling
healthcare costs and potential legislation or regulation of healthcare pricing. Further cautionary information is contained in documents the Company files with the Securities and Exchange Commission
from time to time, including the last Form 10-K, and those risk factors set forth in the most recent registration statement on Form S-3 (File
No. 333-47032) and Form S-4 (File No. 333-49676).

Results of Operations



The Company's license and research revenue decreased to $410,000 for the six months ended December 31, 2000, compared to $15.8 million for the
six months ended December 31, 1999. Fiscal year 2000 revenue included $14.1 million from the sale of certain aspects of its PulmoSpheres®technology to Inhale Therapeutic Systems, Inc
("Inhale"). The Company expects revenue to decrease in 2001 compared to 2000,
primarily because 2000 included substantial revenue received from Inhale.

Research
and development expenses increased by 11% to $27.8 million for the six months ended December 31, 2000, compared to $25.1 million for the six months ended
December 31, 1999. The increase in expenses was primarily due to a $1.6 million increase in payments to outside researchers for clinical trials and other product development work, a
$700,000 increase in staffing costs for employees

11

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engaged in research and development activities, as well as other increases related to the Company's research and development activities.

General
and administrative expenses increased by approximately 9% to $4.7 million for the six months ended December 31, 2000, compared to $4.3 million for the six
months ended December 31, 1999. The increase in general and administrative expenses was primarily due to increased professional fees resulting from financing activities.

Investment
income was $4.7 million for the six months ended December 31, 2000, compared to $522,000 for the six months ended December 31, 1999. The increase was
primarily a result of an increase in realized gains from the sale of short-term investments.

Interest
expense was $1.3 million for the six months ended December 31, 2000, compared to $693,000 for the six months ended December 31, 1999. The increase was
primarily a result of higher average long-term debt balances.

For
the six months ended December 31, 2000, the Company recorded imputed interest expense of $1.1 million related to the beneficial conversion feature on the
$12 million subordinated convertible debentures.



The Company's license and research revenue decreased to $396,000 for the three months ended December 31, 2000, compared to $14.2 million for the
three months ended December 31, 1999. Fiscal year 2000 included net proceeds of $14.1 million from the sale of technology to Inhale.

Research
and development expenses decreased by approximately 5% to $13.9 million for the three months ended December 31, 2000, compared to $14.7 million for the
three months ended December 31, 1999. The decrease in expenses was primarily due to a $500,000 decrease in payments to outside researchers for clinical trials and other product development
work, as well as other decreases related to the Company's research and development activities.

General
and administrative expenses were $2.3 million for the three months ended December 31, 2000, compared to $2.6 million for the three months ended
December 31, 1999. The decrease in general and administrative expenses was primarily due to decreased professional fees.

Investment
income was $514,000 for the three months ended December 31, 2000, compared to $312,000 for the three months ended December 31, 1999. The increase was
primarily a result of higher average cash and short-term investment balances.

Interest
expense was $569,000 for the three months ended December 31, 2000, compared to $320,000 for the three months ended December 31, 1999. The increase was primarily
a result of higher average long-term debt balances.

Alliance
expects to continue to incur substantial expenses associated with its research and development programs. Operating losses may fluctuate from quarter to quarter as a result of
differences in the timing of revenues earned and expenses incurred and such fluctuations may be substantial. The Company's historical results are not necessarily indicative of future results.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The Company is or has been exposed to changes in interest rates primarily from its long-term debt arrangements and, secondarily, its investments in
certain securities. Under its current policies, the Company does not use interest rate derivative instruments to manage exposure to interest rate changes. The Company believes that a hypothetical 100
basis point adverse move in interest rates along the entire interest rate yield curve would not materially affect the fair value of the Company's interest sensitive financial instruments at
December 31, 2000.

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Part II Other Information:

Item 2. Changes in Securities and Use of Proceeds

On November 7, 2000, the Company sold $7 million principal amount of convertible subordinated notes to UBS AG and PIPES Corporate Strategies
Limited. The securities convert at any time upon the request of the holder into common stock of the Company at $15.72 per share, subject to certain antidilution provisions. The investors have the
option to purchase $9.9 million of zero coupon subordinated convertible notes, convertible at $22.17 per share, subject to certain antidilution provisions. The investors are all accredited
investors and the transactions were exempt from registration with the Securities and Exchange Commission under Section 4(2) of the Securities Act of 1933, as amended.

Item 4. Submission of Matters to a Vote of Security Holders

An annual meeting of shareholders was held on November 8, 2000. The following directors were re-elected for the following year and until the
election and qualification of their respective successors:

|Director                  |  | For        |  | Against |  | Withheld  |  | Broker Non-Votes
|------------------------- |  | ---------- |  | ------- |  | --------- |  | ----------------
|Pedro Cuatrecasas, M.D.   |  | 33,975,243 |  | 0       |  | 1,380,360 |  | 0               
|Fred M. Hershenson, Ph.D. |  | 33,976,873 |  | 0       |  | 1,378,730 |  | 0               
|Carroll O. Johnson        |  | 33,859,573 |  | 0       |  | 1,496,030 |  | 0               
|Stephen M. McGrath        |  | 33,976,973 |  | 0       |  | 1,378,630 |  | 0               
|Donald E. O'Neill         |  | 33,971,873 |  | 0       |  | 1,383,730 |  | 0               
|Helen M. Ranney, M.D.     |  | 33,856,543 |  | 0       |  | 1,499,060 |  | 0               
|Jean G. Riess, Ph.D.      |  | 33,862,058 |  | 0       |  | 1,493,545 |  | 0               
|Duane J. Roth             |  | 32,198,549 |  | 0       |  | 3,157,054 |  | 0               
|Theodore D. Roth          |  | 32,284,969 |  | 0       |  | 3,070,634 |  | 0               
|Thomas F. Zuck, M.D.      |  | 33,873,643 |  | 0       |  | 1,481,960 |  | 0               

The
shareholders of the Company voted to increase the number of authorized shares of Common Stock from 75,000,000 shares to 125,000,000 shares thereunder in accordance with the
following vote:

|               |  |                   |  |                 |  |                 
|-------------- |  | ----------------- |  | --------------- |  | ----------------
|33,840,851 For |  | 1,421,593 Against |  | 93,159 Withheld |  | Broker Non-Votes

The
shareholders of the Company voted to approve the 2000 Stock Option Plan of the Company in accordance with the following vote:

|               |  |                   |  |                  |  |                 
|-------------- |  | ----------------- |  | ---------------- |  | ----------------
|31,754,165 For |  | 3,496,622 Against |  | 104,816 Withheld |  | Broker Non-Votes

The
shareholders of the Company voted to ratify the appointment of Ernst & Young LLP as independent auditors of the Company for its fiscal year ending June 30, 2001 in
accordance with the following vote:

|               |  |                |  |                 |  |                 
|-------------- |  | -------------- |  | --------------- |  | ----------------
|35,277,874 For |  | 38,548 Against |  | 39,181 Withheld |  | Broker Non-Votes

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Item 6. Exhibits and Reports on Form 8-K

|       |  |                                                                                                                            
|------ |  | ---------------------------------------------------------------------------------------------------------------------------
|4(i)   |  | Form of 6% Convertible Note dated as of November 15, 2000                                                                  
|4(ii)  |  | Form of Option Agreement and Zero Coupon Convertible Note dated as of
November 8, 2000                                     
|4(iii) |  | Form of Collateral Pledge and Security Agreement dated as of November 15, 2000                                             
|10(a)  |  | Amendment No. 2 to the License Agreement dated as of September 23, 1997 between the Company and Schering Aktiengesellschaft
|10(b)  |  | Consulting Agreement between Alliance Pharmaceutical GmbH and Jean Riess1                                                  

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NONE

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.

| |  |                                                                 
| |  | ----------------------------------------------------------------
| |  | ALLIANCE PHARMACEUTICAL CORP.
(Registrant)                      
| |  | /s/ Tim T. HartTim T. Hart Chief Financial Officer
and Treasurer

Date: February 13, 2001

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Alliance Pharmaceutical Corp.  Form 10-Q  EXHIBIT INDEX

The following exhibits are being filed herewith:

|Number |  | Document                                                                                                                   
|------ |  | ---------------------------------------------------------------------------------------------------------------------------
|4(i)   |  | Form of 6% Convertible Note dated as of November 15, 2000                                                                  
|4(ii)  |  | Form of Option Agreement and Zero Coupon Convertible Note dated as of
November 8, 2000                                     
|4(iii) |  | Form of Collateral Pledge and Security Agreement dated as of November 15, 2000                                             
|10(a)  |  | Amendment No. 2 to the License Agreement dated as of September 23, 1997 between the Company and Schering Aktiengesellschaft
|10(b)  |  | Consulting Agreement between Alliance Pharmaceutical GmbH and Jean Riess1                                                  

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